US Taxation of Multinational Enterprise: Part X

There have been a lot of insightful comments on my posts. sorry that I haven't had time to comment back. Been dealing with horrendous computer problems. Comments on comments soon.

Yesterday, I noted, and one great comment (by the ominously named Consultant) telegraphed, that stripping is the ball game when it comes to protecting the US business income tax base. What is going on? One can get a feel for the hidden concerns here by reading between the lines of the Treasury report that I gave a link to yesterday.

Policy makers want to attract foreign capital and business to the US. The Reagan Administration gave us a shameless example. Most countries impose tax on interest earned within their borders (unless mutually relaxed by a bilateral income tax treaty). The US rate is 30%. In 1984, to help US corporations burdened with higher borrowing costs as a consequence of having to compete against the voracious borrowing of the Reagan Administration, the US repealed the US tax on interest earned in the US by foreign investors. (At the same time, Reagan cut back your interest deduction.) Instantaneously, Manhattan was turned into the largest tax haven in the world. The enforceable tax bases of every country in Latin America disappeared overnight. But US companies got — and continue to get — cheaper borrowing!

Which gets us back to stripping. There is an unspoken assumption among many policy makers that we have to allow Honda and Toyota to reduce their US taxes by stripping in order to get them to open plants in the US. Apparently, the US otherwise is a bum deal. But, we can take US companies for granted. Under this analysis, inversions just involve turning US multinationals into foreign multinationals, which is OK, as it just eliminates the unfair US discrimination against its own companies.